8. Income taxes
Income from continuing operations before income taxes of $3,030.3 million resulted in net tax expense of $1,104.0 million for 2013. We consider our foreign earnings to be indefinitely reinvested, and accordingly have not recorded a provision for U.S. federal and state income taxes thereon. Cumulative undistributed foreign earnings for which U.S. taxes have not been provided are included in consolidated retained earnings in the amount of $82.2 million, $65.6 million and $53.7 million as of December 31, 2013, 2012, and 2011, respectively. Upon distribution of such earnings, we would be subject to United States income taxes of approximately $30.0 million.
The provision (benefit) for income taxes for continuing operations consists of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2013 | | 2012 | | 2011 |
Income from continuing operations before income taxes: | | | | | |
United States | $ | 2,987.6 |
| | $ | 2,185.8 |
| | $ | 2,029.4 |
|
Foreign | 42.7 |
| | 14.6 |
| | (2.3 | ) |
Total | $ | 3,030.3 |
| | $ | 2,200.4 |
| | $ | 2,027.1 |
|
Current provision: | | | | | |
Federal | $ | 1,483.4 |
| | $ | 1,009.5 |
| | $ | 565.2 |
|
State | 192.3 |
| | 216.8 |
| | 42.5 |
|
Foreign | 2.0 |
| | 0.7 |
| | 3.1 |
|
Total current provision | 1,677.7 |
| | 1,227.0 |
| | 610.8 |
|
Deferred provision: | | | | | |
Federal | (520.0 | ) | | (358.5 | ) | | 125.3 |
|
State | (45.3 | ) | | (29.8 | ) | | 12.4 |
|
Foreign | (8.4 | ) | | (0.7 | ) | | 0.1 |
|
Total deferred provision (benefit) | (573.7 | ) | | (389.0 | ) | | 137.8 |
|
Total current and deferred provision | $ | 1,104.0 |
| | $ | 838.0 |
| | $ | 748.6 |
|
A reconciliation of the statutory federal income tax rate and the effective tax rate follows (the effect of foreign taxes on the effective tax rate for 2013, 2012, and 2011 is immaterial):
|
| | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State taxes, net of federal benefit | 2.6 |
| | 5.1 |
| | 2.0 |
|
Non-controlling interest | (0.3 | ) | | (0.3 | ) | | — |
|
Investment in foreign subsidiaries | (0.7 | ) | | (3.0 | ) | | — |
|
Other, net | (0.2 | ) | | 1.3 |
| | — |
|
Effective tax rate | 36.4 | % | | 38.1 | % | | 37.0 | % |
Our effective tax rate from continuing operations decreased to 36.4% for the year ended December 31, 2013, compared to 38.1% and 37.0% for 2012 and 2011, respectively.
During 2013, we recorded a discrete benefit of $51.2 million primarily attributable to investments in certain foreign subsidiaries for which we recognized as a result of various divestitures, deferred tax implications of newly enacted state laws and income not recognized for tax purposes. We recorded a discrete benefit of $8.2 million in 2012 primarily attributable to an income tax contingency related to prior year income tax return filings and investments in certain foreign subsidiaries which we expected to realize in the foreseeable future.
The effective tax rate recognized in discontinued operations was (115.1)% and (30.5)% for the years ended December 31, 2013 and 2012, respectively. There were no discontinued operations in 2011. Our income tax provision from discontinued operations was $28.7 million, and $7.5 million for 2013 and 2012, respectively.
The deferred tax assets and deferred tax liabilities recorded in our consolidated balance sheet are as follows:
|
| | | | | | | |
| December 31, |
(in millions) | 2013 | | 2012 |
Deferred tax assets: | | | |
Allowance for doubtful accounts | $ | 70.9 |
| | $ | 61.6 |
|
Note premium | 81.6 |
| | 101.7 |
|
Tax attributes | 85.9 |
| | 62.7 |
|
Deferred compensation | 6.4 |
| | 12.2 |
|
Equity compensation | 268.7 |
| | 359.5 |
|
Accrued expenses | 406.0 |
| | 329.9 |
|
Federal benefit of uncertain tax positions | 181.8 |
| | 164.9 |
|
Investment in foreign subsidiaries | — |
| | 15.6 |
|
Other | 16.4 |
| | 19.0 |
|
Gross deferred tax assets | 1,117.7 |
| | 1,127.1 |
|
Less valuation allowance | (66.9 | ) | | (34.7 | ) |
Net deferred tax assets | 1,050.8 |
| | 1,092.4 |
|
Deferred tax liabilities: | | | |
Depreciation and property differences | (434.3 | ) | | (444.6 | ) |
Goodwill and intangible assets | (5,585.9 | ) | | (6,164.7 | ) |
Prepaids | (4.0 | ) | | (7.7 | ) |
Other | (11.8 | ) | | (11.3 | ) |
Gross deferred tax liabilities | (6,036.0 | ) | | (6,628.3 | ) |
Net deferred tax liabilities | $ | (4,985.2 | ) | | $ | (5,535.9 | ) |
As of December 31, 2013, we have deferred tax assets for state and foreign net operating loss carryforwards of approximately $46.5 million and $29.7 million, respectively. The state and foreign net operating loss carryforwards, if unutilized, will expire between 2014 and 2033. A valuation allowance of $64.9 million exists for a portion of these deferred tax assets.
A reconciliation of our beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
(in millions) | 2013 | | 2012 | | 2011 |
Balance at January 1 | $ | 500.8 |
| | $ | 32.4 |
| | $ | 57.3 |
|
Additions for tax positions related to prior years(1)(2) | 637.3 |
| | 392.7 |
| | 7.3 |
|
Reductions for tax positions related to prior years(1) | (92.0 | ) | | (1.3 | ) | | (30.3 | ) |
Additions for tax positions related to the current year | 41.7 |
| | 83.7 |
| | 4.9 |
|
Reductions attributable to settlements with taxing authorities | (3.5 | ) | | — |
| | (5.1 | ) |
Reductions as a result of a lapse of the applicable statute of limitations | (22.8 | ) | | (6.7 | ) | | (1.7 | ) |
Balance at December 31 | $ | 1,061.5 |
| | $ | 500.8 |
| | $ | 32.4 |
|
| |
(1) | Includes $50.4 million additions and $8.3 million reductions of Medco income tax contingencies recorded through the allocation of Medco’s purchase price for the quarter ended March 31, 2013. |
| |
(2) | Includes $544.9 million in additions related to a claimed loss in 2012 on the disposition of Liberty. |
Included in our unrecognized tax benefits are $451.4 million of uncertain tax positions that would impact our effective tax rate if recognized.
We recorded $22.8 million of interest and penalties to the provision for income taxes in our consolidated statement of operations for the year ended December 31, 2013 as compared to a $19.6 million charge and a $7.0 million benefit for the years ended December 2012 and 2011, respectively. During 2013, we also recorded $2.4 million of interest and penalties through acquisition accounting for the Merger as compared to $55.4 million in 2012. This resulted in $105.8 million and $80.6 million of accrued interest and penalties in our consolidated balance sheet as of December 31, 2013 and 2012, respectively.
The Internal Revenue Service (“IRS”) is currently examining Medco’s 2008, 2009 and 2010 consolidated U.S. federal income tax returns. This examination is expected to conclude in early 2014 and is not expected to result in a material change to our financial position. In 2013, the IRS commenced its examination of ESI’s 2010, 2011 and 2012 consolidated U.S. federal income tax returns. Our federal income tax audit uncertainties primarily relate to the timing of deductions while various state income tax audit uncertainties primarily relate to the attribution of overall taxable income to those states. We have taken positions in certain taxing jurisdictions for which it is reasonably possible that the total amounts of unrecognized tax benefits may change within the next twelve months. The possible change could result from the finalization of income tax audits and lapses of statutes of limitation. An estimate of the range of the reasonably possible change in the next 12 months cannot be made. The majority of the open tax years subject to examination by taxing authorities are for years subsequent to 2007.
As of December 31, 2013, management intends to pursue a $544.9 million potential tax benefit related to the disposition of Liberty. Based on information currently available, no net benefit has been recognized. Pending the resolution of certain matters, including but not limited to examinations by taxing authorities, all or a part of the deduction may become realizable in the future. We cannot predict with any certainty the exact amount.
